What is Senior Debt? A Comprehensive Guide to Its Legal Definition
Definition & Meaning
Senior debt refers to a type of loan that has priority over other unsecured debts in terms of repayment. This means that in the event of a bankruptcy or liquidation, holders of senior debt are the first to be repaid before any other creditors receive payment. Senior debt is often secured by collateral, which can include various assets of the borrowing corporation. This arrangement is typically established through a subordination agreement or during the public issuance of subordinated debt instruments.
Legal Use & context
Senior debt is commonly used in corporate finance and bankruptcy law. It plays a crucial role in determining the order of repayment when a corporation faces financial difficulties. Legal practitioners may encounter senior debt in various contexts, including:
- Corporate restructuring
- Bankruptcy proceedings
- Loan agreements and financing arrangements
Users can manage some aspects of senior debt through legal templates available at US Legal Forms, which can help in drafting agreements or understanding their rights and obligations.
Real-world examples
Here are a couple of examples of abatement:
Here are a couple of examples of senior debt in practice:
- Example 1: A corporation takes out a senior loan of $1 million secured by its equipment. If the corporation goes bankrupt, the lender will be repaid first from the sale of the equipment before any other creditors.
- Example 2: A company issues senior bonds to raise capital. In the event of liquidation, bondholders will receive payment before shareholders or holders of subordinated debt (hypothetical example).